Shares of Incyte Corporation (INCY) are currently trading at 52-week lows and in the red since my early December piece calling the stock ¨undervalued with catalysts coming¨.
Figure 1: INCY daily advanced chart (source: Finviz Elite)(disclosure: contains affiliate link)
While the original piece pointed out what went well in 2017 and importantly where the story was derailed, we put forth a relatively simple bullish thesis for 2018 and added the stock to the ROTY Contenders List. Reasons I expected a rebound in shares included the following:
- Net product revenue of flagship product Jakafi continued to grow at a heathy clip in the third quarter and I reminded readers that the drug could eventually do $2.5 billion or more in peak sales.
- As reflected in the price to sales measure the valuation appeared much cheaper than it was earlier in 2017. I argued that it indicated an ideal entry point was being offered although further downside was possible.
- As for pipeline catalysts, I noted data from the pivotal REACH1 study evaluating ruxolitinib in patients with steroid-refractory acute graft-versus-host disease is due in the first half of the year with an sNDA to possibly be filed seeking accelerated approval after should results be positive. A key readout I am looking forward to is the pivotal ECHO-301 study of epacadostat combined with pembrolizumab in patients with unresectable or metastatic melanoma. Also, data from their lead BRD inhibitor and first-in-human data from PIM inhibitor INCB53914 are also expected soon.
- I was also encouraged by Incyte´s deal with MacroGenics (MGNX) to gain control of their own PD-1 inhibitor and allow in-house combination studies.
- I was hopeful that the FDA would accept the company´s (with Eli Lilly (NYSE:LLY)) NDA resubmission for baricitinib for which we could see a regulatory in as soon as six months after. The drug candidate was once projected to have peak sales of $1.8 billion.
- Lastly, I noted that institutional clustering bodes well, including the Baker Brothers holding a whopping 34 million shares. BB Biotech (OTC:BBAGF), OrbiMed Advisors, Tekla Capital and several other well-known firms also possess significant stakes.
Figure 2: How responses have changed over time to epacadostat plus pembrolizumab in melanoma patients (source: JPM presentation)
Recently the company raised new long term US revenue guidance to fall in the range of $2.5 billion to $3 billion. This came as management continues to see strong demand for the drug, as well as observations of increased persistency in myeloproliferative neoplasms and potential in graft-versus-host-disease and essential thrombocythemia.
One reason for recent weakness might be that Celgene (NASDAQ:CELG) signed an agreement to acquire Impact Biomedicines (for $1.1 billion upfront and up to $1.25 billion in contingent payments based on regulatory approval milestones for myelofibrosis. Tiered sales-based milestone payments could reach a maximum of $4.5 billion if global annual net sales go past $5.0 billion. The key asset received is JAK2 kinase inhibitor fedratinib, and perhaps the market is seeing this as a competitive threat considering continued weakness in shares. If the drug were to do around $1 billion in sales it would cut into Jakafi´s slice of the pie- Wall Street was previously intimating that Celgene could be a suitor for Incyte, but it´s obvious with this deal that´s not the case.
On January 12th it was announced that the USPTO's Patent Trial and Appeal Board rejected Concert Pharmaceuticals' (CNCE) petition challenging the validity of their U.S. Patent No. 9,662,335 covering deuterated ruxolitinib analogs. Litigation is likely to ensue and investors will want to stay abreast of key developments here.
Also in the beginning of the month the company inked an agreement with Syros Pharmaceuticals (SYRS) to use the smaller firm´s gene control platform to find new therapeutic targets with an emphasis on MPNs. Incyte receives global rights for up to seven targets to intellectual property and commercialize therapies that may arise as a result.
Figure 3: Increased long term revenue guidance for Jakafi (source: JPM presentation)
As noted before, for the third quarter the company reported cash and equivalents of $1.3 billion, while net income came in at 36 million, or $0.17 per basic and diluted share.
With the possible acquisition of Juno Therapeutics (JUNO), M&A could swing back into focus for biotech and Incyte could be an enticing target for an acquirer while trading at relative lows.
Incyte is a Buy.
Readers who have done their due diligence and are interested in the story should purchase a pilot position in the near term. I would wait for technical confirmation before adding significantly to the position as well as further positive developments. The stock may be more appropriate for my more conservative readers who search for stocks with several irons in the fire and multiple catalysts that could result in material upside.
Risks are many, including the possibility of additional dilution or financing in the next couple of years. Additionally, although unlikely disappointing data from the pivotal ECHO-301 study would weigh heavily on shares. Negative FDA reaction in response to the NDA resubmission for baricitinib would also result in additional downside. Setbacks in the clinic (especially in its varied late-stage programs) would likely result in a continued crisis of confidence on the part of existing investors and Wall Street.
It needs to be evident that the expansive R&D budget is paying dividends in the near term and therefore could continue to yield fruit for the long haul. The threat from Concert Pharmaceuticals' (CNCE) CTP-543 (deuterated ruxolitinib) is a concern as well. Another reason for recent selling has been the strength of Nektar Therapeutics' (NKTR) data for NKTR-214 in combination with nivolumab for patients with stage IV melanoma, renal cell carcinoma and non-small cell lung cancers. I remind readers the data is from a low number of patients in an early-stage study, and also that the PD-1 combination opportunity should support several key assets and is not a zero-sum game.
For readers interested in stocks with near- to medium-term upside, I encourage you to take a look at the latest edition of ROTY (Runner of the Year) which includes our ROTY 10-stock model account and the ROTY Contenders List.